The automobile industry and the financial holding/investment banking industry have been singled out in reference to the current bailout debate. Since these industries have been experiencing extensive hardships, we have been asked to consider bankrolling them into the future. True to form, other industries have now reserved their place in line for a government hand-out.

The repercussions of such a hands-on, interventionist strategy are extensive. One of the questions that we as traders should be asking is if such a bailout will promise success for both the industries in question and the markets in general, or would a more free-market solution be more effective? Investors, on the other hand, are wondering if these previously recognized blue-chip growth stocks, which are now slumbering in the financial basement, are a good buy, considering their currently inexpensive asking price. An investor/trader must always bear in mind, however, that they are the definition of a risk taker because any investment, after all, is a risk—one that hopefully yields a reward in the future.

A good way to analyze and understand the issues with this strategy of interventionism and fiscal manipulation is to look back to the first big bailout of modern times. Before A.I.G., Fannie and Freddie, and even before Bear Stearns, there was Chrysler.

In 1979, when it was still the tenth largest company in the country, Chrysler found itself on the verge of disintegration, largely because high oil prices had made its hefty, gas-consuming automobiles less appealing to the masses (much like today). Company executives, along with union leaders, came to Washington with their heads hung low and proceeded to argue that Chrysler’s dissolution would wreak unacceptable havoc on the American economy.

Congress and the Carter administration responded by arranging for $1.2 billion in subsidized loans, which was an extremely extravagant amount of money, and still is, even when adjusted for inflation. The Reagan administration helped further in 1981 by restricting Japanese imports in an effort to increase the ability and opportunity of Chrysler to increase their supply to meet consumer demand.

On paper, the Chrysler rescue was a big success. Under Lee Iacocca, the company came out with the original minivan, as well as the K-car line of smaller vehicles similar in design to the Dodge Aries. By the mid ‘80s, Chrysler had repaid the loans in full, with interest. Mr. Iacocca later appeared on the cover of Time Magazine as “Detroit’s Comeback Kid,” and his autobiography became a number one best seller.

One can see a clear connection from the Chrysler bailout to the recent attempts to steady Wall Street. Back then, Washington “insisted on a few pounds of flesh, like a wage freeze for Chrysler workers, in exchange for aid. Mr. Paulson has done something similar by insisting that shareholders of the Wall Street firms benefit little from any bailout.” (Leonhardt, 2008) But why should the shareholders be kept from any perceived benefits when, after all, it is the shareholders who assume most, if not all, of the risk?

In 1979, the government structured the Chrysler deal so that taxpayers might earn a profit from it, which they did. This past year, the Federal Reserve effectively purchased securities from Bear Stearns that it hopes to sell for a gain when the financial markets calm down. Harvard economists have recently said of the matter, “While it’s way too early to know if the strategy will succeed as well as it did three decades ago, it’s certainly conceivable” (Leonhardt, 2008). Conceivable or not, many are certainly wondering when it became a viable fiscal policy for the United States government to purchase equity in private institutions.

The Chrysler bailout may have saved the company, but it did nothing to stop Detroit’s long, sad, and (some would say) inevitable decline. This begs the question as to whether or not we are doomed to repeat history until we finally find a way to learn from it. Is there something that investors can learn from the events of yesteryear regarding the fiscal decisions our leaders in Washington are making?

Discussions of the policy implications of the crisis have primarily focused on the immediate economic demands. “The need to ensure the capital adequacy of financial institutions, maintain important credit flows, support the housing sector and the real economy, contain international spill¬overs and reform regulation to prevent any recurrence of the crisis have rightly been the priority. In all these areas there will be many crucial policy choices to make in the months ahead” (Summers, 2008)

Whether you are a fan of the actions taken by our political leaders or not, the constant in this equation is that the idea of bailing out industries as they experience wicked declines has consistently entered into the discussion.
This method of Keynesian macroeconomic maneuvering is becoming something of a phenomenon as political leaders look to bail companies out first in an effort to solidify voting bases, rather than allow the business cycle to follow through. We have essentially allowed our political leaders to create an economic precedent that may be extremely hard to rescind, if not impossible; and with this precedent comes an environment that carries with it some rather volatile conditions.

It may be difficult for our leaders to understand the realities of the business cycle. With the good comes the bad; with every retraction and contraction in the cycle, an expansion will gloriously follow. While it may be towards the expansions of the business cycle that our gaze is fixed upon, I would argue that it is during these gleeful expansions that we actually create the most damage in our market-based economy. It is when we are sitting on top of a newly created peak, with the recent memory of the trough eliminated from our consciousness due to the current good times that we allow fundamental rules and moral obligations to be broken in exchange for quick-and-easy cash, sturdy profits, electoral victories, or obscene performance-based bonuses. If history has taught us anything in the world of finance, it has taught us that greed can move the markets just as significantly as fear, the only difference being the speed by which these two emotions propel us.

While it may have worked for Chrysler, thus benefiting the company and the taxpayers who footed the bill, the question still remains as to whether or not this line of problem-solving is actually in the best interest of a capitalistic society. It may fall directly into the line of Keynesian economic theory, but it creates an economic atmosphere that could easily mute any opposing ideas. It creates an extremely ambiguous environment for traders to operate in because of the cause-and-effect status that politicians generate through their grandstanding and midnight voting sessions.

There are handfuls of examples that easily compare what Chrysler went through with what several large corporations and industries are going through today. Unfortunately, the automobile industry is right back where it started: in search of yet another government bailout. Is this perpetual trend something worth protecting in an apparent free and capitalistic economy? Or are we, through our leaders’ actions, choking the roots by which we have grown into a global economic behemoth?

One thing is for certain. A person who intends to trade capital in a system that is becoming more and more manipulated by government interaction and regulation needs to keep both eyes and ears wide-open in an effort to remain vigorously prepared for and updated on the day’s goings-on. It may take some time to become comfortable deciding which strategy will suit a given eco-political situation or event, but it is possible, and can certainly be profitable. The main ingredient to this recipe is a cup of practice, with a tablespoon of more preparation, and a pinch of constant observation and due diligence.